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A Few Possible Junior Gold Stock Pitfalls on the Horizon

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The description of the VanEck Vectors Junior Gold Miners ETF states the fund as being “intended to track the overall performance of small-capitalization companies that are primarily involved in the mining of gold and/or silver”. What this description of GDXJ does not tell you is the fact that they have changed the definition of what is a small-cap junior mining company.

In June of 2017, the fund managers at VanEck made a radical change to the ETF by expanding the universe of companies eligible for inclusion in the GDXJ. The $4 billion exchange-traded fund owned huge positions in its underlying holdings, which put it at risk of violating certain Canadian and U.S. regulatory thresholds. To avoid crossing those thresholds, the ETF bought up stocks of companies that were not in its index, creating a significant divergence between the ETF components and the index components.

To fund the buying of the new index additions regarding this change, the existing index components at the time faced steep selling in an already beaten down precious metals complex. This “fix” entailed morphing the index into a mid-tier/major miner ETF with only a handful of traditional juniors in the GDXJ, as opposed to remaining a self-proclaimed “Junior Gold Stock Fund”.

The change also further served the interest of the ETF fund managers, as it allowed them to increase the size of the fund and thereby increase their revenue. But more importantly, it resulted in many of the actual small-cap junior gold stocks being orphaned by the market, creating very good entry points in select juniors for savvy long-term contrarian speculators.

Although there has not been a formal announcement from VanEck, there is a rumor in the space about the fund managers making another radical change in the GDXJ criteria. Joe Mazumdar, who co-authors the highly respected newsletter Exploration Insights with high-profile geologist Brent Cooke, mentioned in his PDAC presentation earlier this month that VanEck may eventually be eliminating non-cash flowing companies from the fund. If this indeed takes place, the GDXJ would be in danger of becoming a strictly a mid-tier/major miner ETF by no longer holding any traditional small-cap junior gold stocks.

Moreover, now that Barrick Gold Corp has pulled its $18 billion offer for Newmont Mining Corp and agreed to form a joint venture in Nevada with its rival, the earlier proposed Newmont/Goldcorp merger will most likely be taking place in April. If so, there would be a possible divesting of Goldcorp’s holdings in various junior developers after this mega-merger is official, as the strategic investment model has not been an ongoing strategy of Newmont.

Although both of these possible divestment situations are just hearsay, for now, you may wish to factor in the possibilities of the market beginning to price them into relevant juniors when performing due diligence on your current holdings and/or watch list hopefuls. It may be wise to pay close attention to the price action of non-cash flowing juniors which are included in the GDXJ, as well as juniors who are strategically owned by Goldcorp.

Meanwhile, April Gold is consolidating its gains from its November-February rally and remains in a well-defined holding pattern above strong support at $1280 heading into the FOMC meeting next week. Although the Fed’s Dot Plot continues to show two more rate hikes this year, the market has priced in a pause and is expecting chairman Jerome Powell to remain patient while keeping interest rates at 2.50%.

The downside price level in the GDX to pay close attention to is $21.50, which may be tested after the FOMC meeting speech at 2pm EST on March 20th. This support line has held on decreasing volume with gold remaining over the $1280 region thus far, while positive divergence between gold and gold stocks continues to trend higher from the GDX low on September 11th, 2018. I expect the quality junior gold stocks to continue bifurcating from the sector, while the gold price consolidates its gains above critical support at $1250.

Continuing to concentrate on accumulation of the best in breed juniors during this correction is recommended. While the GDX is consolidating its recent gains, deep value opportunities remain in the sub-$500M market cap growth-oriented producers, high-margin project developer/explorers, and cashed-up, early stage micro-cap juniors. If you require assistance in choosing the best quality juniors to invest, please stop by my website and check out the subscription service at http://juniorminerjunky.com/

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.

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